Home Builders to Suppliers: You’re Part of the Problem if You’re not Part of the Solution
With so much of focus going to housing demand stimulus policy that has been playing havoc with monthly new home sales trends, it takes readers to bring the conversation back to earth.
Here’s what one production home builder wrote to us about his experience last week in Las Vegas at the International Builders Show:
“Still lots of folks WAY out of touch on the supplier side. Expensive stuff catering to a market that might never return, green touches that buyers won’t pay for, the cattle call financing section was off the rails…..builders don’t need someone to talk to them about financing a ‘deal’ they need someone to finance the future (deals, vertical, overhead…..getting back to work). I think that I was impressed that the show was well attended. You’re spot on that it proves that there are survivors who are looking for the next opportunity. I think that the disconnect between the supplier side and the builder side is wide though. I can’t even begin to guess how companies that sell $20,000 to $50,000 software apps plan to market in the coming years, how the fringe suppliers will survive. If more with less is something that customers are demanding certainly the suppliers didn’t seem to be trumpeting the charge.
There you have it. A gap separates building materials, products and services suppliers from the needs of their customers, the home builders. Government policy has been working like an on-again-off-again spiggot, but home builders are mostly still struggling to understand how to work in the real world beyond the punch-bowl economic gyrations of the moment.
So, in the real world, everybody takes a hair cut, and not one they think will be the most flattering. Homeowners have given up trillions of dollars in household wealth–including home values; builders and developers have done the same with regards to their raw material–building lots–pipeline; banks are smothering in toxic and petrified assets and greed.
In a “good enough” era, a baby steps marathon is more likely to be the way out of the world of hurt than any sudden blast of recovery.
Which is why we should focus questions on the role of builder-supplier partnerships in what’s likely to be a long, long path to healing in the market. After the policy punch bowl goes away, what to expect? The answer is work.
Just as banks, investors, land holders, land losers, the owers and the owed are now just beginning to engage in a great financial reoganization that will reset home prices more in line with household incomes and monthly rents, builders need to have similar work-out plans with their supply sources.
Value engineering is not a new term, but the urgencies around making it more than just a b.s. phrase to describe doing things in design, construction, and operations essentially the same old way are peaking.
Our reader’s view expressed above is that products, services, and materials suppliers should be highly motivated to be part of the solution to reset new home prices on higher-performance new homes lower.
“We can’t compete on price alone,” says Jenne Conger, vice president of sales and marketing at History Maker, a Dallas-area home builder that has four generations of staying power in a market that’s cyclically as tough as they get. “We had to find a point of difference for our buyers in addition to the affordable price point. That point of difference, for us, is green.”
Here’s how the company describes its “green” value offering:
The world is going green and History Maker Homes is no different. To add even more value to all of our homes, we’re now offering a guaranteed energy savings option called Energywise, from BaySystems™, the umbrella brand for the global polyurethane systems operations of Bayer MaterialScience. Bayer MaterialScience is a subgroup of Bayer AGAG, an international health care, nutrition and innovative materials group that produces Bayer Aspirin. This Energywise system provides energy performance improvements that add value to every home through reduced lifecycle costs and improved sustainability, resulting in a two-year guarantee of annual heating and cooling costs.
History Maker, which Conger attests maintained flat sales year-on-year with 2008’s level, sold 60 of its 400 homes in 2009 with the Energywise package. Their price point? Under $200k.
BaySystems’ explanation of the package:
Energywise’s “systems approach to residential energy efficience combines an optimally designed HVAC system with Bayseal spray foam insulation installed by an Energywise Preferred Contractor… Of the 40,000+ homes designed and build using the energywise Energy Cost Savings Guarantee, annual energy savings are commonly more than 50% versus conventional construction.
“Yes, the buyer pays more in the purchase price of the home to get the Energywise package,” Conger says. “But when we go through the total operating cost analysis with the home buyer, and they see the cash flow positive difference from the minute they take over ownership, they’re not put off by the fact that the initial investment adds about $25 or less to their monthly mortgage payment. They’re saving way more than that with the guaranteed energy cost and savings from day one.”
We heard lots of talk among builders that the cost of energy high performance and other sustainable features outweighed the willingness of home buyers to ante up in this environment.
Still, History Maker and Bayer Material Science, which is pushing to expand its distributor and installer network for concerted growth among bigger volume home builders, have apparently struck a balance in their message: Monthly total operating costs, especially when they capture savings in energy and put money back into homeowners’ pockets, are beginning to hit an inflection point as new home buyers grudgingly move off the sidelines into purchases.
At one of the educational seminars during the IBS, Tim Sullivan, of Sullivan Group Real Estate Advisors, had a come-back for home builders who wonder “is this green thing going to remain a factor in our business?”
“If you’re not leveraging monthly total operational expense savings to include energy performance in your new home marketing and sales, then something’s wrong with this picture.”
Sullivan, albeit his Southern California base of perspective, has it right. We may have the luxury of considering energy performance an extravagance or an option at this point, but that’s merely testament to the power of denial.
At any rate, here’s the key point: suppliers that, like Bayer Material Science, can give home builders a point of difference in their submarket selling effort, offer sustainability or high-performance in that point of difference, and partner with the builder to make the investment affordable are going to go into the early lead and maintain it as tough times stretch farther ahead and recovery becomes a glimmer.
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